USD/JPY Fundamental Weekly Forecast – Ripe for Relief Rally after Congress Agrees to New COVID Stimulus Deal

The Dollar/Yen was crushed last week, trading down to its lowest point since early March or the start of the coronavirus pandemic. It slumped to a nine-month low against the safe-haven Japanese Yen, even though investors had been buying up risky assets all week.

Last week, the USD/JPY settled at 103.313, down 0.736 or -0.71%.

The catalysts behind the weakness in the dollar were the vaccine rollouts, progress in Brexit trade talks and U.S. stimulus negotiations. The dollar was also pressured after the U.S. Federal Reserve pledged to maintain its bond-buying programs until the economy returns to full employment.

Central bank policymakers said they would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” the post-meeting statement said.

“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Federal Open Market Committee added in a statement that gained unanimous approval.

The Bank of Japan ends its two-day policy meeting on Friday and is expected to leave rates steady but announce an extension of a package of steps aimed at easing corporate funding strains.

BOJ Unveils Plan to Probe Better Ways to Hit Inflation Goal

The Bank of Japan last Friday extended its fund-aid scheme for firms hit by the coronavirus pandemic and pledged to begin an examination on more effective ways to achieve its 2% inflation target, as a renewed spike in infections threatened to undermine a fragile recovery.

As widely expected, the central bank kept monetary policy steady including its pledge to guide short-term interest rates at -0.1% and 10-year bond yields around zero.

Weekly Outlook

Last week, the BOJ surprised the markets by announcing its plan to review its monetary easing. However, it wasn’t really much of a surprise because it actually made the move to align itself with recent moves by the European Central Bank and the Federal Reserve to examine the course of monetary policy. As one analyst put it, “The BOJ must have thought it would be left behind in the global monetary policy trend if it did not follow suit.”

The inability to follow-through to the downside after breaking the November bottom last week suggests the USD/JPY may be oversold and due for a short-covering rally. Furthermore, the holiday-shortened week could be the right time to begin booking profits after the steep break. Additionally, end of the year position-squaring is also possible.

Late Sunday, the U.S. Congress reached a deal Sunday on a $900 billion coronavirus relief package, according to Senate Majority Leader Mitch McConnell and Minority Leader Chuck Schumer. This news is potentially bearish for the U.S. Dollar, but since this news was likely priced into the USD/JPY, we could see a relief rally this week.